Top 10 subprime originators lean to left coast

LauraMandaro

SAN FRANCISCO (MarketWatch) -- The West is the best, sang a '60's rocker -- and that sentiment also rings true among subprime mortgage originators.

For those harboring curiosity about which companies waded deepest into the now-stormy subprime mortgage market, a snapshot of the top 10 originators in the fourth quarter shows a heavy Westward slant.

Seven of the 10 are based in California, according to a ranking published by trade publication National Mortgage News. One, Washington Mutual Inc.
WM, +0.16%
is based in Seattle.

Of course, many of these mortgages -- a class of loans made to higher-risk borrowers -- financed houses in New Jersey, Minnesota and Florida. But many houses are likely to be in California, the source of the most subprime mortgages issued in 2005, which was a banner year for the mortgage market.

"House price appreciation was very fast through California, and that acts as incentive for all people across the spectrum to get a toehold into housing," said Tony Hughes, managing director of credit risk analysis for Moody's Economy.com.

Soaring home prices also encouraged lenders to do business with borrowers dogged by past credit problems.

"In a rising market, the prospect of lenders losing money on loans to relatively pretty poor credit-risk borrowers is mitigated by the fact that the value of collateral is rising rapidly," he said.

But the industry is facing a severe reversal of those heady days.

Many of the most active subprime mortgage lenders have lately warned that a pick-up in late payments from their borrowers -- or no payments at all -- will hurt earnings.

For borrowers already stretching to make monthly payments, higher interest rates and stagnant or falling home prices removed the option of refinancing to secure lower payments -- a major safety valve that had kept many mortgages in the black.

Take Prospect Heights, Illinois-based HSBC Finance, which held the No. 1 spot in the fourth quarter by making $12.3 billion in subprime loans. Parent London-based HSBC
HBC, -2.10%
earlier this month said it took a $10.6 billion asset impairment charge to last year's earnings, blaming much of the write-down on bad subprime loans. See HSBC earnings.

The warnings from HSBC and others have sent shockwaves through the stock market, as investors fear the aftermath of America's home-buying boom is starting to taint the rest of the economy. The stocks in the Dow Jones Industrial Average
DJIA, +0.45%
have shed over 5% of their value in the past three weeks, pressured by subprime concerns.

The ranks of the largest originators included big banks like HSBC and Wells Fargo & Co.
WFC, +0.80%
whose business loans, credit card fees and insurance revenues offset problems from subprime loans. But several were subprime mortgage specialists that are struggling to stay afloat under a wave of defaults.

New Century Financial Corp.
NEWC
was the second most active lender in the final three months of last year. The Irvine, Calif. lender's shares were delisted from the New York Stock Exchange Tuesday as it risks bankruptcy and faces a criminal probe related to its subprime business.

On Tuesday, Countrywide Chief Executive Angelo Mozilo told CNBC that with only 7% of the company's originations coming from the subprime end of the market, the nation's largest mortgage originator expects to eventually gain from the industry's current gyrations.

He said after the meltdown, Countrywide will likely find itself free of "all the irrational competitors" and that "looks very positive for us," he said, according to Dow Jones.

First Franklin Financial Corp., a San Jose, Calif.-based unit of Merrill Lynch & Co.
MER, -1.13%
was the fifth largest subprime mortgage lender.

And San Francisco-based Wells Fargo came in at No. 6, with $7.4 billion in subprime mortgages. That's a steep drop from the third quarter when the banking company was the biggest subprime originator by far, with $23 billion in loans, according to National Mortgage News.

The drop reflects a change to the way Wells Fargo reports its subprime mortgage originations to the trade press.

Prior to the fourth quarter, the banking company included co-issue loans, or mortgages for which it had bought the servicing rights while an investor such as an investment bank purchased the underlying loans.

"Including co-issues in our nonprime loan production was confusing investors and others," said Wells Fargo spokesman Jay Lawrence. As of the fourth-quarter, the company started to report only the subprime mortgages it originated, he said.

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